There’s no denying cannabis stocks have had a rough go of it since February. Canopy Growth (NASDAQ:CGC) stock is down more than 70% since Feb. 1. Of course, Canopy is not alone.
Investors had high hopes for U.S. federal cannabis legalization coming into 2021. Democrats had control of the White House and both houses of Congress, potentially paving the way for cannabis reform. Unfortunately, 10 months into the new administration, there has been essentially zero progress on the legalization front. Meanwhile, Canadian cannabis sales continue to disappoint.
CGC stock investors are rightfully disappointed with how the stock has performed in the last eight months. But the lower the stock price falls, the more realistic a Canopy buyout becomes.
CGC Stock By The Numbers
No matter how you look at them, Canopy’s recent numbers aren’t pretty. In fiscal 2021, Canopy reported 37.1% revenue growth, down from 76.2% in fiscal 2020. The company reported an adjusted earnings per share loss of 4.69 CAD in fiscal 2021, larger than its 3.80 CAD EPS loss in 2020.
Canopy has previously said it will reach earnings before interest, taxes, depreciation and amortization (EBITDA) profitability in the second half of fiscal 2022. Bank of America analyst Heather Balsky recently downgraded CGC stock from “buy” to “neutral.” Balsky says the downgrade comes as Canopy faces increasing risk that it will not meet its profitability timeline. She says delayed retail reopenings in Canada, supply chain issues and a lagging ramp of Canopy’s BioSteel powdered sports drink are creating near-term financial uncertainty.
Balsky is calling for 26.3% revenue growth and negative C$114 million in EBITDA from Canopy in fiscal 2022. She has a $17.50 price target for CGC stock.
Last year, minority Canopy investor Constellation Brands (NYSE:STZ) exercised $173 million in warrants. Those warrants brought Constellation’s ownership stake in Canopy up to 38.6%. Constellation has also installed its former CFO as Canopy’s CEO. I’ve long suspected this move may have been part of a long-term strategy for Constellation to clean up Canopy’s balance sheet and business efficiency in preparation for a full buyout. Canopy has spent recent years pulling back from international expansion and focusing on bringing new products to market, such as edibles and drinks.
If Constellation wants its shareholders to approve a Canopy buyout at some point, the company needs to be running like a well-oiled machine. It would probably also help if Canopy is within reach of profitability, which seems roughly a year away at this point.
But a key part of convincing Constellation shareholders of a CGC stock buyout is the price tag. Canopy is still far from cheap at 8.9x sales. However, Canopy is currently holding a 70% off sale compared to where it was nine months ago. In fact, the lower CGC stock falls, the more attractive a buyout target it becomes for Constellation Brands. At some point and at some price, you have to assume Constellation would seriously consider pulling the trigger on a takeover bid.
In the meantime, CGC stock has potential for a significant turnaround if the cards fall correctly in the U.S. Sen. Elizabeth Warren and Sen. Cory Booker are pressing the Department of Justice to decriminalize cannabis on a federal level.
No, decriminalization is not legalization. But it could open the door for U.S. multi-state operators to uplist to major U.S. stock exchanges. One such MSO is Acreage Holdings (OTCMKTS:ACRHF). Canopy has a deal in place to conditionally acquire Acreage in the event of U.S. federal cannabis legalization. What’s good for Acreage is good for Canopy in the near term.
Decriminalization might also reassure Constellation that an outright Canopy buyout wouldn’t ruffle any feathers in Washington. In the longer term, U.S. legalization could set Canopy up as the top cannabis stock to own.
“We remain bullish on CGC’s long-term potential and think its best positioned among Canadian producers to enter the US upon federal legalization,” Balsky says.
The Acreage buyout could make Canopy a heavy hitter in a massive U.S. cannabis market the day marijuana is legalized.
How To Play CGC Stock
I still own CGC stock. I’ve suffered through frustrations with Democrats in Washington along with the rest of Canopy bulls. Decriminalization could certainly turn the tide of negative cannabis stock sentiment in the near term. Any indication that some form of progress is being made on cannabis reform could be a bullish catalyst.
I have always said U.S. legalization will likely take longer than cannabis optimists had hoped. In the meantime, every cent that CGC stock drops makes it one cent cheaper for a potential Constellation buyout.
On the date of publication, Wayne Duggan held a long position in CGC. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Wayne Duggan has been a U.S. News & World Report Investing contributor since 2016 and is a staff writer at Benzinga, where he has written more than 7,000 articles. Mr. Duggan is the author of the book “Beating Wall Street With Common Sense,” which focuses on investing psychology and practical strategies to outperform the stock market.